Do Small Business Investors Get a Percentage Forever?

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Do Small Business Investors Get a Percentage Forever?

Whether or not small business investors get a percentage forever depends entirely on the specifics of the agreement. Find out if small business investors get a percentage forever with help from a public relations and marketing professional in this free video clip.

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Hi. My name's Heddi. I'm the big cheese founder of Travel Gift Card, mytab.co, not .com, we are .co, with my best friend, Muppet Bundle Cundle who's so hot and Schvitzy, and she just needs to lay out in the garden, but she can't because she's working today. Today we're talking about something really interesting. Do small business investors get to keep their equity forever. No. Because either the company is going to completely die its death and never take off so their money's never going to get anywhere because you can't get a percentage of nothing. Or you're going to go and get acquired by a larger company. And then there's going to be a crunch crunch crunch down version which I'll explain to you afterwards and how that works on equity without anti-dilution. Or you're going to go IPO and that means a ton more people get involved. So there's like three main ways it will go and directions it will go. Come with me and I'm going to show you how it works. OK. A very simple word document. Do small business investors get a percentage forever. No way. But what happens you ask. They get equity in the company as shares or stocks. This is usually diluted. And so the more people that invest, the crunching of the percentage reduces from the hundred percent that's available. So you're going to get something like, you don't say like 5 percent shares, you're going to say like 20 pay shares. Then, OK, you then give away more shares. It needs to come out of the hundred percent part. Remember Facebook with Eduardo Saverin when he was really annoyed when Facebook went IPO, and he didn't get as much stock as thought he was going to get. That's because it was crunched and crunched down with more investors coming on board. So his 10 percent reduces down to 5 percent, reduces down to 3 percent, reduced down to 1/2 percent. If the company fails thought, nobody gets anything, absolutely no-brainer. There is a cliff, it's usually four years for vesting annually. So after the first for years you're going to have, say for example you're going to get 2 percent equity or 20 thousand shares. And over the years you're going to end up getting 5 percent or you're going to end up getting 5,000 shares you can start vesting per year. This can go on like even up to ten years or longer. There might be a window of opportunity where you can actually vest. If it came to that maybe a month or two, if the company's acquired then the percentage is distributed to the investors by cash after a specific duration or they can cash out some or all of their equity. That's when you see basically companies that, hey I'm just going to go and cash out like maybe I don't know, 10 percent of my percentage of equity or I'm just going to only, I'm going to keep it in the pot for the next few years. If you go IPO, it's a whole different ballgame because you've gotta to remember you can now sell these over that then can be resold out to the public. You can keep some, you can keep some and sell them. Everything changes in the system. So remember, you've got something like, oh god Muppet you are a heavy lump today, if you're going to go, say for example, you're going to have investors coming on board, and maybe you're giving away I don't know, like 7 percent of your stock to your advisers and you're giving away to your team and you haven't got a co-founder. Or you do have a co-founder and you're maybe giving away like I don't know, like 40 percent, so you're still owning like 60 percent of the company. Now you decide that you're going to sell your company. That's totally fine. You're going to have a board seat, that means you're in control, nobody can throw you off the whole system. But if you get more and more people involved in this and you go public, that 40 percent that was there, has now been crunched down because you need to go and get from a hundred percent now you need to go and give away 20 more percent maybe to shareholders. From that you're then crunching the numbers down so that 40 percent is not reduced down to, I don't know what the number is, about 25 percent. So each person that had 5 percent before, has now got less and less because it's of the total a hundred percent. If I understand this, she understands this, you understand this. But check into anti-dilution because there might be some people that come on board that say they want anti-dilution so they get 5 percent shares, they get 5 percent of the company. It's irrelevant whether you go public or get acquired, they will always get 5 percent. Now Eduardo Saverin didn't do that which is why he got crunched and crunched and crunched and crunched down. But the guy still did very very OK out of it. My name's Heddi. I'm the big cheese founder of Travel Gift Card, mytab.co, not .com, .co, with my best friend, Muppet Bundle Cundle.